Coston, Matter of

• Citation: 987 F.2d 1096
• Decision Date: 30 October 1992
• Docket Number: No. 92-4399,92-4399
• Parties: In the Matter of Rodney Dale COSTON and Billie Katherine Coston, Debtors. Rodney Dale COSTON and Billie Katherine Coston, Appellants, v. BANK OF MALVERN, Appellee. Summary Calendar.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1096

987 F.2d 1096

In the Matter of Rodney Dale COSTON and Billie Katherine

Coston, Debtors.

Rodney Dale COSTON and Billie Katherine Coston, Appellants, v. BANK OF MALVERN, Appellee.

No. 92-4399

Summary Calendar.

United States Court of Appeals, Fifth Circuit.

Oct. 30, 1992.

Josh Henslee, Dale Long, Tyler, Tex., for appellants.

Woodrow M. Roark, Tyler, Tex., for appellee.

Appeal from the United States District Court for the Eastern District of Texas.

Before KING, DAVIS, and WIENER, Circuit Judges.

WIENER, Circuit Judge:

In this bankruptcy case, Debtors-Appellants Rodney and Billie Coston (the Costons) appeal two rulings of the bankruptcy court--one procedural and the other substantive--and the affirmations of those rulings by the district court, in favor of Appellee, Bank of Malvern (the Bank). The Costons ask us to reverse the bankruptcy court's rulings that (1) the Bank timely filed its motion for non-dischargeability of a loan, and (2) the loan itself was not a dischargeable debt. Concluding that the bankruptcy court erred in its determination of non-dischargeability of the debt, we reverse that court's decision and the subsequent affirmance thereof by the district court.

I FACTS AND PROCEDURAL HISTORY

Both of the Costons were employees of American Airlines. They resided part of the time in Malvern, Arkansas, where Rodney's family had been long-time residents, and the other part of the time in Athens, Texas. In Malvern, they purchased a pleasure-boat manufacturing operation, which became the Coston Corporation. In furtherance of that business, the Costons took out a series of loans from the Bank, the first of which--the one here at issue--was for $175,000.

To obtain the $175,000 loan (and others), the Costons were required to submit a joint financial statement to the bank. On that statement, Rodney represented that his account in his employer's retirement plan was worth $1.2 million (which it was) and was readily convertible into cash (which it was not). At several meetings with representatives By the late 1980s, the Costons had begun to experience business and financial problems. On January 25, 1989, the Bank and the Arkansas Development and Finance Authority (ADFA), another of the Coston's Arkansas creditors, filed a petition in the bankruptcy court for the Western District of Arkansas, forcing the Costons into involuntary bankruptcy. The next day the Costons filed a voluntary petition in the bankruptcy court for the Eastern District of Texas. Pursuant to bankruptcy rule 1014(b), ¹ ADFA filed a notice of stay with the bankruptcy court in Texas, which notice informed that court of the requirement that it stay all proceedings involving the Costons. The court in Texas had already set March 1, 1989, as the date for the first meeting of creditors and was in the process of setting other deadlines when it was informed of the stay. Given the pre-existence of the Arkansas proceedings and the rule 1014(b) stay, the court in Texas cancelled the creditors' meeting and in essence put the bankruptcy proceedings in Texas on hold pending disposition by the court in Arkansas of a motion to determine proper venue.

                of the Bank after filing the statement, Rodney reiterated those representations.   The court found that the bank, in making the loan, relied on Rodney's representation that the retirement fund was readily convertible to cash
                

On May 10, 1989, the bankruptcy court in Arkansas entered an order dismissing the involuntary petition, effectively resuscitating the Texas proceeding. The bankruptcy court in Texas then set the initial meeting of creditors for July 10, 1989. Within sixty days after this meeting, the Bank filed its "Complaint Objecting to Discharge" of the $175,000 note. At that point, and consistently thereafter, the Costons argued that the Bank's objection to discharge was untimely because it was not filed within sixty days following the March 1, 1989, meeting, ² even though that meeting had been cancelled by the bankruptcy court in Texas under the Rule 1014(b) notice of stay from its counterpart in Arkansas.

The bankruptcy court in Texas rejected the Costons' argument because the Bank's motion had been filed within sixty days after the July 10, 1989, meeting. The court reasoned that the requirement to file within sixty days of the March 1, 1989, meeting had been nullified--not merely postponed and rescheduled--by the stay notice under rule 1014(b) filed in the bankruptcy court in Texas. ³ The court went on to hold that the $175,000 note was not dischargeable, explaining that the Costons had (1) submitted materially false information to the bank to procure the loan, and (2) the bank had reasonably relied on that information in making the loan.

The Costons appealed the bankruptcy court's decision to the district court, asserting error in the bankruptcy court's rulings as to timeliness of the Bank's opposition to discharge and as to the dischargeability of the debt. The district court affirmed both rulings of the bankruptcy court after which the Costons timely appealed those issues to this court.

II

ANALYSIS

A. Standard of Review

On appeal of a bankruptcy case, reviewing courts--district and courts of appeals alike--must accept the findings of fact of the bankruptcy court unless the findings are clearly erroneous. ⁴ Also, "due

                regard shall be given to the opportunity of the bankruptcy court to judge the credibility of witnesses." 5  Circuit courts are guided by the rule that "[s]trict application of the clearly erroneous rule is particularly important whe[n] the district court has affirmed the bankruptcy court's findings." 6  Matters of law, however, are reviewed de novo. 7
                

B. Timeliness of the Bank's Motion

Procedurally, the Costons argue that the Bank's failure to file its objection to discharge of the $175,000 note within sixty days of the March 1, 1989, scheduled date for the first meeting of creditors makes that motion untimely. We join the bankruptcy and district courts in disagreeing with this assertion. The Costons rely on the strictness of bankruptcy Rule 4007(c), which commands that "[a] complaint to determine the dischargeability of any debt pursuant to § 523(c) of the Code shall be filed no later than 60 days following the first date set for the meeting of the creditors." ⁸ The Costons cite no less than twenty-five cases to this court to inform us of the meaning and rigidity of that phrase. But not one of those cases--or for that matter any of the cases cited to the district court--deal with a situation involving a stay under Rule 1014(b).

Rule 1014(b) mandates:

If petitions commencing cases under the Code are filed in different districts by or against (1) the same debtor, or (2) a partnership and one or more of its general partners, or (3) two or more general partners, or (4) a debtor and an affiliate, on motion filed in the district in which the first petition is filed and after hearing on notice to the petitioners and other entities as directed by the court, the court may determine in the interest of justice or for the convenience of the parties the district or districts in which the case or cases should proceed. Except as otherwise ordered by the court in the district in which the first petition is filed, the proceedings on the other petition shall be stayed by the courts in which they had been filed until the determination is made. ⁹

In reliance on this rule, the Bank insists, and we agree, that it did not have to file its motion in the Texas bankruptcy court until the Arkansas case was terminated and the Rule 1014(b) stay was lifted. The instant situation is precisely what is comprehended in Rule 1014(b). Once the notice of stay was recognized by the court in Texas, that court's proceeding was on hold indefinitely until the stay was lifted and the proceeding in Arkansas dismissed. Only when that occurred and a date was set for the initial meeting of creditors did the sixty days begin to run. In the stay situation, the new date set by the court is the "first date" under Rule 4007(c); it is not merely a rescheduling of the old pre-stay date.

Facially, this ruling may appear to contradict the wording of Rule 4007(c). But, in light of Rule 1014(b), no other result is sensible or possible. The Bank cannot be penalized because it did not comply with a filing deadline of a court whose proceedings had been stayed. To suggest that even though the court's proceedings on the Costons' case had been stayed under Rule 1014(b), its filing deadline under Rule 4007(c) continued to run is ludicrous. We reject this procedural contention by the Costons.

C. Non-Dischargeability of the $175,000 Note

Substantively, the Costons argue that they were wrongfully denied discharge of the $175,000 note under § 523 of the bankruptcy code. The bankruptcy court properly noted that there are four elements needed to deny a discharge: (1) a statement in writing that is materially false; (2) that concerned the debtor's financial It is clear from the record, as the bankruptcy court found, that the statement was (1) in writing, (2) materially false (the asset had been improperly placed in the liquid assets column of the form), (3) concerned with the debtor's financial condition, and (4) made by the debtor with the intent to deceive. ¹¹ Like the district court before us, however, we have a problem with the question of the reasonableness of the Bank's reliance on the Coston's statement that the $1.2 million retirement fund was readily convertible to cash. We readily acknowledge that this case presents a close call as to whether the reliance of the bank was reasonable. If we were constrained by the clear error standard on this issue (as the Costons wrongly assert we are--albeit such an assertion is against their interest), there is no doubt that we would have to affirm. We are not, however. Although reliance is an issue of fact, reasonableness is an issue of law; and we conclude here that in view...